Each country answers by its own rules, and the answers do not match. The United States disregards a single-member LLC by default and looks to its owner, who is taxed there only if the facts bring the income within US tax. HMRC's general view is that a US LLC is a company, so the United Kingdom may tax the LLC itself, the owner on what it pays out, or both. An LLC owned by a foreign person also reports to the IRS every year in which it has dealings with that owner, whether or not any US tax is due.
This post is for a UK resident who is not a US citizen or green card holder and who owns a Delaware LLC alone, often one formed online to sell to American customers. It goes further than the LLC section of our guide to US-UK tax for founders, fund managers and executives, and it ends with what changes where the owner is a US citizen living in the UK.
How does the US classify a Delaware LLC with one owner?
As nothing separate from its owner, unless it chooses otherwise. The IRS treats a domestic LLC with only one member as a disregarded entity (opens the official IRS page in a new tab) for income tax, so its income and expenses are regarded as the owner's own. That default holds until the LLC elects on Form 8832 to be classified as a corporation.
An LLC with two or more members is a partnership by default and may also elect corporate treatment on Form 8832 (opens the official IRS page in a new tab). The classification follows the number of members and any election made, not the state of formation.
Disregarded does not mean invisible. The IRS still treats a single-member LLC as a separate entity for employment tax and certain excise taxes, and, as set out below, for one international information return. An election, once made, turns the LLC into a US corporation paying US corporate tax on its own profit, which is a different structure with different results in both countries.
- One member, no election: disregarded, with the owner treated as earning the income
- Two or more members, no election: a partnership
- Any LLC that elects on Form 8832: a corporation for US tax
Does a UK resident owner pay US tax on the LLC's profit?
Only where the facts bring the income within US tax. A non-resident alien is taxed on income effectively connected with a trade or business in the United States, and on certain US-source income that is not. An LLC formed in Delaware does not create a US business by existing, and it does not rule one out.
Publication 519 (opens the official IRS page in a new tab) says that whether a person is engaged in a trade or business in the United States depends on the nature of the activities. Performing services while physically in the United States usually counts, and so does owning and operating a business there that sells services, products or merchandise. Where the owner works from the UK and the LLC has no staff, premises or agents in the United States, the analysis is different, but it remains a question of fact.
The treaty adds a second test. Under the business profits article of the US-UK income tax treaty (opens the official IRS page in a new tab), the profits of a UK enterprise are taxable in the United States only so far as they are attributable to a permanent establishment there, meaning a fixed place of business such as an office or a place of management. Whether that protection applies to a particular owner is a point to review under our treaty relief service. A non-resident alien who is engaged in a US trade or business files Form 1040-NR even if the income is exempt.
What does a foreign-owned LLC file with the IRS if no tax is due?
An information return. A US disregarded entity wholly owned by a foreign person is treated as a corporation for the limited purpose of Form 5472 (opens the official IRS page in a new tab). It files a pro forma Form 1120 (opens the official IRS page in a new tab) with Form 5472 attached for each year in which it has a reportable transaction with its owner, and the penalty for failing to file is $25,000.
Reportable transactions are wider than sales and fees. For a foreign-owned disregarded entity the instructions include amounts connected with forming and dissolving the entity, and contributions to it and distributions from it. An owner who funds the LLC's bank account and later draws the profit has reportable transactions in an ordinary year, even where no US tax is payable and no other US return is due.
The mechanics differ from an ordinary corporate return. The pro forma return carries only identifying details, cannot be filed electronically, and goes by post or fax to a dedicated IRS address by the due date of Form 1120, including extensions. Our page on Form 5472 describes the filing, and we prepare it within our business tax returns service.
- An employer identification number for the LLC, requested on Form SS-4
- A pro forma Form 1120 with Form 5472 attached, sent by post or fax
- A statement describing contributions, distributions and other dealings with the owner
- Books and records that support what the form reports
What forms do US customers and the state of Delaware ask for?
US payers ask for a withholding certificate, and Delaware charges an annual tax. Because the LLC is disregarded, the foreign individual who owns it is treated as the person receiving its income and gives the certificate in his or her own name. The form goes to the payer and is not sent to the IRS.
The usual certificate for a foreign individual is Form W-8BEN (opens the official IRS page in a new tab), and our page on Form W-8BEN explains what it claims. Its instructions direct a person whose income is effectively connected with a US trade or business to give Form W-8ECI instead, so the choice of certificate follows the analysis in the section above. Form W-8BEN-E is the version for foreign entities and is not the form for an individual owner.
Delaware's Division of Corporations states that an LLC formed in the state pays an annual tax and is not required to file an annual report, and that a penalty and interest apply to late payment.
How does HMRC treat a US LLC owned by a UK resident?
Generally as a company. HMRC's International Manual lists the US limited liability company as opaque, which in HMRC's terms means its members are taxed in the UK on distributions and not on the LLC's profits as they arise. The manual describes that list as a general view which may vary with the facts of a specific entity.
The Supreme Court tested the point in Anson v HMRC [2015] UKSC 44. It held that a UK resident member of a Delaware LLC was entitled to double taxation relief, because on the facts found about that LLC's agreement and Delaware law the profits belonged to the members as they arose. In Revenue and Customs Brief 15/2015, HMRC said it had concluded that the decision is specific to its facts. It will continue to treat US LLCs as companies where they have been treated as companies, will continue its existing approach to whether an LLC issues share capital, and will consider individuals' relief claims that rely on Anson case by case.
The result is a mismatch. The United States looks through the LLC to the member, while the UK may tax a distribution from a company as the member's income. Where US tax has been paid on the profit, HMRC may regard the profit and the distribution as different income, so double tax relief is a point to review against the LLC agreement and is not automatic.
Can a Delaware LLC be UK resident for Corporation Tax?
It can. A company incorporated outside the UK is UK resident under case law if its central management and control is exercised in the UK, which HMRC's manual describes as primarily a question of fact. If the LLC is a company in HMRC's view and its only decision-maker lives and works in the UK, UK residence has to be considered.
A UK resident company is within Corporation Tax (opens the official GOV.UK page in a new tab) on its profits, at the 19% small profits rate, the 25% main rate or an effective rate in between. The owner would then be taxed separately on what the LLC pays out.
Take a British software consultant living in Bristol who formed a Delaware LLC online because her clients are American. She does all the work from Bristol, the LLC has no office or staff in the United States, and she moves money in and out of its account. On those facts the US questions are whether there is any US trade or business at all, and Form 5472 each year. The UK questions are whether the LLC is resident in the UK and how her drawings are taxed. Each answer turns on her documents and conduct.
- Where the owner makes the LLC's strategic decisions
- What the LLC agreement says about entitlement to profit
- Whether anyone acts for the LLC from a place in the United States
- What has been paid into the LLC and drawn from it each year
What changes if the owner is a US citizen living in the UK?
The US side changes completely. A US citizen is taxed on worldwide income wherever the work is done, so the profit of a disregarded LLC is reported on Schedule C (opens the official IRS page in a new tab) of Form 1040 each year, with no need for a US trade or business. Form 5472 as described above does not arise, because the owner is not a foreign person. The IRS also applies self-employment tax to the owner as it would to a sole proprietor, at 15.3% before relief.
Relief from that charge comes from the totalization agreement (opens the official SSA page in a new tab), which assigns a self-employed person who resides in the UK to UK coverage and is evidenced by a certificate of coverage from HMRC. The UK side is as described above: HMRC's general view of the LLC as a company, the residence question, and credit for tax paid in the other country as a point to review. Our post on the check-the-box election for a UK limited company covers the mirror image, where the entity is British and the classification choice is American.
Structure choices depend on the facts, and neither an LLC nor a UK company is right for every owner. We compare them on both returns before anything is formed, through our business incorporation and international tax services. For how entity choice sits beside pay planning, the anti-deferral rules and a later sale, return to the guide to US-UK tax for founders, fund managers and executives.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
